Pound Sterling remains on backfoot as BoE rate cut expectations deepen

Pond Sterling falls sharply after the big drop in UK inflation data.A steady US Dollar and increasing bets over upcoming BoE rate cut weigh on the Pound Sterling.This week, the US core PCE price index and UK Retail Sales data will be keenly watched.

The Pound Sterling (GBP) struggles for a firm footing as a sharp drop in the United Kingdom Consumer Price Index (CPI) for November has deepened expectations of early rate cuts by the Bank of England (BoE). The GBP/USD pair is exposed to more downside as the Pound Sterling has lost its competitive advantage of a longer restrictive policy stance after a sharp decline in inflation.

BoE policymakers may continue favouring a restrictive policy stance until price stability is ensured, but market participants are expected to keep rate cut expectations alive. The next economic trigger for the Pound Sterling will be the Retail Sales data for November, which is scheduled for Friday. Higher-than-projected growth in consumer spending may bring some relief for the Pound Sterling.

Daily Digest Market Movers: Pound Sterling consolidates ahead of US, UK data

Pound Sterling falls after a bigger-than-anticipated drop in UK inflation.
Annual headline inflation fell sharply below 4.0% amid a significant decline in fuel prices.
Annual core CPI that excludes volatile food and Oil prices softened to 5.1% against expectations of 5.6%.
After a sharp decline in UK inflation, Finance Minister Jeremy Hunt said the data showed inflation pressures were being removed from the economy, Reuters reported.
A bigger drop in price pressures in November has bolstered bets in favour of early rate cuts by the BoE in 2024.
Investors see a 50% chance for first rate cut by the BoE in March. On the contrary, investment banking firm Goldman Sachs advanced its projection for the first rate cut to May from June after inflation fell to two-year low.
While significant improvement in inflation towards 2% has escalated bets in favour of early rate cuts, policymakers are expected to remain lean towards a restrictive monetary policy stance.
This week, BoE policymakers Sarah Breeden and Ben Broadbent emphasized keeping interest rates higher for longer to keep price pressures in check.
The major reason behind favouring a restrictive monetary policy stance for longer is to gain confidence that inflation is clearly in a downtrend as price pressures in the UK region are highest than peers in Group of Seven economies.
Going forward, investors will focus on the Retail Sales data for November, which will be published on Friday at 07:00 GMT.
As per the preliminary estimates, monthly Retail Sales are expected to grow by 0.4% against a contraction of 0.3% in October. Annually, retail spending contracted at a slower pace of 1.3% against a former decline of 2.7%.
The US Dollar Index (DXY) consolidates in a tight range as the upside is capped due to deepening rate cut expectations by the Federal Reserve (Fed). The downside seems limited temporarily as investors await the release of the core Personal Consumption Expenditure Price Index (PCE) for November, scheduled for Friday.

Technical Analysis: Pound Sterling is at a make or a break near 1.2640

Pound Sterling struggles for a firm footing after an intense sell-off to near a weekly low of around 1.2640. The GBP/USD pair is expected to see more downside as a further breakdown would expose it towards the psychological support of 1.2500.

On a daily timeframe, the trend is still bullish as 20-day and 50-day Exponential Moving Averages (EMAs) are advancing. Momentum oscillator, Relative Strength Index (RSI) (14), is indicating further consolidation ahead.